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Targeting the ‘sweet spot’ in tenant market

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Better opportunities to come, investors should bide their time waiting for discounted deals, experts advise

Market conditions are enticing for buy-to-let property investors but they need to be wary of falling tenant performance and rising vacancies.

Statistics from TPN show the number of tenants in good standing with rental payments dropped by 8% to 73.24%. “For context, at the height of the global financial crisis tenants in good standing plummeted to 71%,” says managing director Michelle Dickens.

Tenants in the “did not pay” category increased to 19%. However, one of the biggest challenges looming now for the property market, she says, is higher vacancy levels. Investors will therefore need to carefully weigh their options.

They could also hold out a bit longer as FNB commercial property economist John Loos believes better buying opportunities are still to come.

“Investment buying opportunities are improving but I do not think we are yet at the greatest buying opportunity of the cycle. More financial pressure is still to come and that will result in greater sales and more stress selling of properties.”

Dickens says: “The residential rental market is going to take years to recover, and there is a prediction that there will be a tsunami of distressed properties coming onto the sales market in the coming months. Investors should bide their time waiting for discounted deals.”

In addition, Loos says there is always a lot of resistance from sellers to reduce their prices and while price correction is moving slowly, sellers do ultimately drop their prices. It takes time though and could even be a couple of years.

“When the decline in property prices outstrips rental decline then ultimately yields will improve.” He adds that it is “always tough” to know when to become a buy-to-let investor. Vetting and getting the right tenant is crucial. For investors looking to buy now, they need to know the state of the tenant market they are targeting.

“The sweet spot is the R7 000 to R12 000 category. The market above R25 000 is weak and the low end of the market is more financially fragile and harder hit by recessions.”

Properties that attract rentals in this “sweet spot” will be priced under R1 million. Aspiring buy-to-let investors need to be able to calculate the potential yields, Loos explains.

“If the rental yields are 10% then you are looking at a R1.2 million property but the yields are currently lower than that, at about 7%.” “Get hold of TPN reports or speak to agents to get this information. Vetting and credit checks are very important.

“To be a successful investor you have got to know your stuff. A lot of unseasoned investors do not do their homework and end up with properties with low rental yields.”

Property investor Grant Smee says there are pockets of excellence in the market and taking a long-term view to property investment will service buyers well in the long run. Investors should also consider where to put their money.

“Co-living and communal spaces – particularly student lets, remain exciting areas for investments. Here, an owner has multiple leases to a single property and therefore, with all things considered, their overall risk should be lower.

“With our large, young population, secure estate living remains popular for new families or couples looking to start a family. Buying off -plan is also a great option as it gives you time to save and this property type generally starts increasing in value before you even move in.”

TPN’s research shows that small, affordable properties will be the most in demand as more tenants downscale. Dickens says the R4 500 to R12 000 rental bracket has the biggest demand and better collection rate. Sectional title properties “deliver the best gross yields”, with two-bedroom properties leading the way.

“Entry-level properties – rentals below R3 000 per month, are seriously challenging to manage, but if you get the formula right it delivers the highest yield; high risk equals high reward.”

Dickens says TPN is hopeful the number of tenants in good standing has “turned a corner” as collections for the first week of August were higher than preceding lockdown months.


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